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Disclaimer: I'm not a quant and don't know where to source data on this topic. But from what I'e read, the size of the derivatives market was approximately 5-6

by nhebb 15y ago

Disclaimer: I'm not a quant and don't know where to source data on this topic. But from what I'e read, the size of the derivatives market was approximately 5-6X global GDP in the mid 00's. Now, it's over 20X global GDP. If that market ever crashed, we'd be looking back at the crash of '08 as 'good times'.

andylei 15y ago
those numbers are really bad measures of risk. those are probably notionals on derivatives. if you're trading a swap, the notional may be 100B, but the amount actually at risk may be something like 10 bps, which is just 100MM. Also, its not like if the market crashed, all of the value of the derivatives go to zero. Derivative holdings always have counterparties. If you make 100MM, someone else loses 100MM and vice versa. this isn't foolproof, as there is counterparty risk, but it makes the system a lot more stable than your statistics make it seem. TLDR: The total risk of the derivative market is nowhere near 20X GDP.
- nhebb 15y ago
  I'm not challenging you on this, but I still remember Buffet's comment from years ago that they were weapons of mass destruction. What is the risk and how do regulators ensure that any untoward risk is mitigated?
  - steve8918 15y ago
    Buffett makes a great deal of cash flow from writing options, so take what he says with a grain of salt. "The brilliance behind Buffett’s investment in Berkshire is astounding. He effectively used (and uses) Berkshire as the world’s largest option writing house. The premiums and cash flow from his insurance business created dividends that he could invest in other businesses. But Buffett wasn’t just buying Coca-Cola and Geico as many have been led to believe. Buffett was placing some (short-term AND long-term) complex bets in derivatives markets, options markets, and bond markets." http://pragcap.com/the-many-myths-of-warren-buffett http://pragcap.com/the-many-myths-of-warren-buffett
- TDL 15y ago
  Below is a link describing the "netting" effect that occurs in the derivative markets. https://derivativedribble.wordpress.com/2008/10/24/netting-demystified/ https://derivativedribble.wordpress.com/2008/10/24/netting-d...
justincormack 15y ago
Thats kind of misleading. First those figures are probably notional underlying, which doesnt mean much. Second contracts have a buyer and a seller, so net value is zero. So it does not work like a stock market crash destroying (presumed) wealth. They should be teaching kids the basics of this stuff in schools...
- steve8918 15y ago
  Don't forget about counterparty risk. This is something everyone forgot about during 2008 and ended up being one of the biggest problems. This is what happened with AIG, where people thought they were adequately hedged on their position because they bought a CDS with AIG, and then it turned out that AIG itself had written so many CDSs that it couldn't pay back its obligations, which exacerbated the entire financial crisis.

by nhebb 15y ago

andylei 15y ago

those numbers are really bad measures of risk. those are probably notionals on derivatives. if you're trading a swap, the notional may be 100B, but the amount actually at risk may be something like 10 bps, which is just 100MM. Also, its not like if the market crashed, all of the value of the derivatives go to zero. Derivative holdings always have counterparties. If you make 100MM, someone else loses 100MM and vice versa. this isn't foolproof, as there is counterparty risk, but it makes the system a lot more stable than your statistics make it seem. TLDR: The total risk of the derivative market is nowhere near 20X GDP.

nhebb 15y ago
I'm not challenging you on this, but I still remember Buffet's comment from years ago that they were weapons of mass destruction. What is the risk and how do regulators ensure that any untoward risk is mitigated?
- steve8918 15y ago
  Buffett makes a great deal of cash flow from writing options, so take what he says with a grain of salt. "The brilliance behind Buffett’s investment in Berkshire is astounding. He effectively used (and uses) Berkshire as the world’s largest option writing house. The premiums and cash flow from his insurance business created dividends that he could invest in other businesses. But Buffett wasn’t just buying Coca-Cola and Geico as many have been led to believe. Buffett was placing some (short-term AND long-term) complex bets in derivatives markets, options markets, and bond markets." http://pragcap.com/the-many-myths-of-warren-buffett http://pragcap.com/the-many-myths-of-warren-buffett
TDL 15y ago
Below is a link describing the "netting" effect that occurs in the derivative markets. https://derivativedribble.wordpress.com/2008/10/24/netting-demystified/ https://derivativedribble.wordpress.com/2008/10/24/netting-d...

justincormack 15y ago

Thats kind of misleading. First those figures are probably notional underlying, which doesnt mean much. Second contracts have a buyer and a seller, so net value is zero. So it does not work like a stock market crash destroying (presumed) wealth. They should be teaching kids the basics of this stuff in schools...

steve8918 15y ago
Don't forget about counterparty risk. This is something everyone forgot about during 2008 and ended up being one of the biggest problems. This is what happened with AIG, where people thought they were adequately hedged on their position because they bought a CDS with AIG, and then it turned out that AIG itself had written so many CDSs that it couldn't pay back its obligations, which exacerbated the entire financial crisis.